Obagi Medical Products third quarter net income increases to $4.4M

Obagi Medical Products, Inc. (NASDAQ: OMPI), a leader in topical aesthetic and therapeutic skin health systems, today reported financial results for the third quarter and nine months ended September 30, 2011.

Net income for the third quarter of 2011, rose to $4.4 million, or $0.24 per diluted share, up from $1.6 million, or $0.07 per diluted share, in the third quarter of 2010.

Net sales for the third quarter of 2011 totaled $28.1 million, compared with $27.9 million a year ago. Domestic net sales increased $0.6 million, or 2.7% for the quarter, despite the impact of lower shipments into Texas following the Company's decision to suspend distribution of certain products in late April after discussions with certain Texas regulatory agencies.

Gross margin for the third quarter of 2011 was 79.9%, which compared with 79.3% for the same period last year. Operating expenses for the third quarter of 2011 totaled $15.6 million, down 20.1% from $19.5 million a year ago, primarily as a result of $2.8 million in litigation, termination and related expenses associated with the Zein Obagi matter incurred during the third quarter of 2010, along with lower research and development costs in the 2011 third quarter, due to timing of new product efforts.

The Company generated cash flow of $6.1 million from operations in the third quarter of 2011, bringing total cash and cash equivalents at September 30, 2011 to $27.0 million, up from $15.1 million at December 31, 2010.

For the Nine Months Ended September 30, 2011 Compared to a Year Ago:

• Total net sales were $83.5 million compared with $82.5 million a year ago. Domestic net sales increased $0.6 million or 0.9% over the same period last year despite the impact of lower shipments into Texas.
• Gross margin was 78.9% versus 79.0% a year ago.
• Net income totaled $4.9 million, or $0.26 per diluted share, compared with $6.6 million, or $0.30 per diluted share, a year ago.
• On a non-GAAP basis, net sales were $85.2 million and net income was $10.9 million, or $0.58 per diluted share, compared with $9.6 million, or $0.43 per diluted share for the same period last year. Please refer to the attached table to reconcile GAAP to non-GAAP financial measures.

Recent Significant Events

In the third quarter of 2011 and subsequent weeks, the Company:

• Added 316 new accounts, bringing the total number of active accounts to 6,617 at quarter's end, up 2.8% from a year ago.
• Announced that in July, the Aesthetic Surgery Journal published a study showing that using Obagi's Condition & Enhance (also marketed as Nu-Derm), when combined with Botulinum Toxin Type A treatments (BOTOX®), provides greater improvement in overall facial appearance, as well as increased patient satisfaction vs. BOTOX treatments with placebo. Also of note, 100% of study participants using the Condition & Enhance System wished to continue treatment after the close of the study.

The Company also announced that it has identified the elements necessary to establish a web-based online fulfillment operation including, a nationwide mail-order pharmacy. Al Hummel, the Company's President and CEO, stated, "For 20 years, we've been transforming the faces of millions of women. Today, Obagi is transforming itself. This robust e-commerce platform will become the bridge connecting our physician customers to patient end-users. The information and leverage we gain by being at the nexus of each transaction will permit us to add value to the physicians' businesses, while making the purchase of Obagi products materially more convenient for end-users."

Mr. Hummel said that one reason for this move is the high degree of interest in Obagi shown on the Internet, which the Company's historical business structure cannot adequately serve. "Each month, there are upwards of 400,000 discrete searches performed on the term "Obagi" or on related terms. We will now be able to collect this interest in one place and capture a portion of it for the benefit of our physician customers. In addition, this new initiative will enable us to refer potential new patients who come to our site to Obagi's physician customers."

Mr. Hummel said there were additional strategic motivations behind the Company's entry into the e-commerce and fulfillment businesses. "Right now, only about 15% of the total population of possible end-users accesses our historical distribution channel," he said. "With this platform, we will be able to devise and put into action long-term strategies to pursue the remaining 85%."

Fourth Quarter Financial Guidance

Based on current trends and the expectation that consumer confidence will remain at current levels, the Company is reiterating previously provided total year guidance. Management anticipates increased operating expenses in the fourth quarter as compared to the third quarter inclusive of the above-mentioned strategic initiatives. For the year, non-GAAP revenue is expected to be in the range of $114.0 million and $116.0 million, and non-GAAP earnings per diluted share is expected to be between $0.75 and $0.78. This implies that fourth quarter guidance would have revenue in the range of $29.0 million and $31.0 million and earnings per diluted share between $0.16 and $0.19. The earnings per share guidance assumes approximately 18.7 million dilutive shares.